Foreign Direct Investment and war in Sri Lanka
The Sri Lankan government had to spend on development as well as fighting against LTTE terrorism for nearly past 3 decades. The effects of the global economic recession also badly affected for the country's development. But now the economy is recovering from the economic down turn and the North east war and gradually achieving a considerable growth. The Central Bank of Sri Lanka has forecasted a maximum GDP growth rate in 2010 to be between 6-7% compared to 3.5% achieved in previous year  .
2. The current ruling government after addressing the root causes of high expenditure is seeking ways to reduce poverty of the country by directing more investments to remote, disadvantaged areas. The end of 30year war with LTTE has opened the door for reconstruction and development projects in North and East. Since the above development process is difficult to be achieved only by public and domestic private investments, every possible steps being taken to achieve more foreign investments to the country. In general, it is believed that inward Foreign Direct Investment (FDI) can contribute to the growth of the host country's economy. Attracting FDI has been one of the most important policy goals of developing countries. With the globalization many countries around the world have experienced substantial growth in their economies, especially in the form of FDI.
3. Even within the conflict free environment, foreign financial flows to Sri Lanka were affected due to the impact of the global financial crisis resulted in the drying-up of new equity investments channeled to the FDI enterprises  .Foreign Direct Investments of Sri Lanka has fallen 17.66 percent from US$ 252.68 million for the first six months of 2009, to US$ 208.05 million during the first six months of this year 
4. The end of the long war itself would not be the only stimulus to attract greater FDI to the country. Many of the South Asian countries are there to compete with Sri Lanka in attracting FDI from the developed countries. Hence the need of liberalization of FDI policies by introducing reforms to the existing packages has been clearly identified by the present government. Further, alleviation of infrastructure and institutional bottlenecks also being identified as priority concerns in achieving the above objective.
5. This particular research was conducted to see whether there is any causal effect of post war environment on the FDI coming to Sri Lanka. The study was conducted using the available information regarding FDI values and trends by taking in to account the period of 2005-2010. Year 2005 was selected since the 4th Elam war was started in that particular year.
6. The remainder of the paper is structured as follows. Chapter 2 discusses the Methodology of the research where aims of the study, problem statement, research hypothesis, the general and specific objectives and the limitations of the study are stated. Chapter 3 includes the Background literature on the study area. Chapter4 carries out the Data collected and the source of data. It also describes the sample used in the analysis.Chapter5 extends the Analysis of data using Microsoft Excel and identifies the trends and causal relationship between post war environment and FDI inflow. It also includes the findings of the research and whether the hypothesis is being proved or disproved. Relevant tables and graphs are presented in this chapter. Finally, Chapter 6 concludes the research findings and provide suitable Recommendations based on the analysis.
AIM OF THE RESEARCH
1. The aim of this research is to explore whether there is any positive impact of the end of war on the foreign direct investments to the country.
2. Within the conflict-free, investor favorable environment everybody's expectation was to see a boom in FDI to Sri Lanka. The Sri Lankan government's attempt is to achieve the FDI target of US$ 1 Billion during 2010 compared to US$ 602 Million achieved in year 2009.
3. There are a number of factors at play when the investment generation in to a certain country is concerned. The economic situation of the country, the availability of labour, the political situation, assistance from the government and private institutes, availability of land etc. are some of them. For the past 30 years the economic development of Sri Lanka has been hampered by the civil war and it had destroyed the investor confidence to a greater extent. With the end of war in May 2009, direct investment opportunities have emerged in many areas. Integration of north and eastern part to the rest of the country after the war has a greater contribution for creating new investment opportunities.
4. As a result of end of 30 year war, there is a significant increase in FDI coming to Sri Lanka.
5. The general objective of the research is to determine whether the post war environment in Sri Lanka conducive to greater FDI
6. The specific objectives of the research are as follows:
a. To evaluate which sectors have the growing interest among foreign investors
b. To explain the present position of BOI projects
c. To determine which changes need to be introduced to the existing incentive packages in order to attract more FDI to the country.
d. To understand the functions of BOI and Export Processing Zones (EPZ) concept since 1978 to date
e. To determine the positioning and establishing of major projects before May 2009.
SCOPE OF THE STUDY
7. The scope of this research covers the analysis of trend of Foreign Direct Investment (FDI) inflow to the country, effect of post war environment on FDI, significance of FDI for the country's development and the background of Investment facilitating agency of the country.
LIMITATIONS OF THE STUDY
8. In order to conduct the research it was assumed that the investment decision has only been affected by the end war while the other elements remain unchanged. Further the estimated value of the investment was taken in to consideration but not the actual investment that has come in to the country. The time available to conduct this research was only three months which is not adequate to conduct a detailed analysis. The length of the paper is being limited to 5000 words.
WHAT IS FDI?
1. Foreign Direct Investment (FDI) can be defined as an international investment made with the objective of a lasting interest by a resident entity in one economy in an entity resident in another economy  . More simply it is the investment of foreign assets into domestic structures, equipment, and organizations. The inward investment flows benefits both the home country (the country from which the investment originates) and the host country (the destination of the investment). Foreign investment is considered as one of the significant drivers of development. It provides an inflow of foreign capital and funds, in addition to an increase in the transfer of skills, technology, and job opportunities  .
2. FDI is thought to be more useful to a country than investments in the equity of its companies. Because FDI, once established is durable and generally useful whether things in a country go well or bad. Equity capital, the reinvested earnings and foreign loans are the main components of FDI. It does not include foreign investment made into the stock markets (portfolio investment).
3. FDI is an important vehicle for the transfer of technology. Hence, the contribution of FDI is relatively higher on economic growth than domestic investment. When foreign companies set up in host country there is also the possibility of development of Human Capital through in house and overseas training facilities provided by the companies. However, in order to get the higher productivity of FDI, the host country should have a minimum threshold level of human capital.
IMPACT OF FDI ON A COUNTRY'S ECONOMIC GROWTH
4. Literature suggests that the FDI inflows have a positive impact on economic growth of host countries.
5. Increasing foreign investment can be used as one measure of country's economic growth. Sometimes it is considered as the engine of growth. FDI is recognized not only in terms of capital formation, but also for its spill over effects on trade and technological progress. FDI can promote the economic development of the host country by helping to improve productivity growth and exports. 
6. The impact of FDI on an economy can be considered in terms of a number of indicators. Though the FDI is beneficial to the development of the host country, sometimes some negative effects are also associated with this  .
POSITIVE EFFECTS OF FDI
7. Some of the positive effects of the FDI are as follows:
a. FDI provides capital which is usually missing in the host country.
b. Foreign investors are capable of financing their investments efficient and often cheaper
c. Foreign investments create new job opportunities in host country
d. FDI brings new technologies that are usually not available in the target country.
e. Foreign projects provide better access to foreign markets
f. "Crowding in" effect (The foreign corporations often bring additional investors into the target country (ex. their usual subcontractors)
NEGATIVE EFFECTS OF FDI
8. Some of the positive effects of the FDI are as follows:
a. Smaller and weaker economies can face much local competition.
b. If foreign corporations use their usual suppliers for raw materials it can lead to increased imports. (This is ok if the production is export driven).
SRI LANKA AND ITS INVESTMENT CLIMATE
9. Prior to economic liberalization, Sri Lanka has followed inward looking economic policies, which had limitations for foreign investors and free flow of FDI. There were limitations for FDI during the period of 1950-1977  . Public sector controlled majority of share of the country's resources.
10. Later government has identified the market oriented economic policy as the most efficient engine of growth and political entities have made it their top priority to create an investment friendly economic climate in 1977.With that objective the Greater Colombo Economic Commission (GCEC) was established in 1978 with the objective of encouraging Foreign Direct Investment specially in export-oriented activities. Export Processing Zones were also developed with the necessary infrastructure and other needs of GCEC enterprises. Up to now, Sri Lanka has twelve (12) export processing zones  .
11. The investment promotion campaign of GCEC was aimed at attracting Foreign investment in enterprises, which involve extensive use of foreign capital, improved sophisticated technology (High-tech industries), export-oriented manufacturing, and large- scale infrastructure projects. In year 1992 the GCEC was replaced by the Board of Investment of Sri Lanka (BOI).
12. Foreign investment inflows to Sri Lanka continued to increase over the last decade as a result of investment favorable policies adopted by the successive government. However, time to time the downturn in world economic activities, slowing down in capital inflows to developing countries and deterioration of investor confidence due to the civil war started in 1983 adversely affected the investment inflows to Sri Lanka in the past few years.FDI inflows in Sri Lanka have increased considerably year by year as a percentage of GDP.
FDI inflows into Sri Lanka, 1970-2002 
Source: UNCTAD/TNC database.
CIVIL WAR IN SRI LANKA AND ITS EFFECT ON THE DEVELOPMENT
13. For the past 30 years Sri Lanka has been in distinct disadvantage. The outbreak of the war which was started in 1983 severely disrupted the annual flows of foreign investments. The country's development has been shrinked by the Tiger Terrorist restricting access to the North and East region which is considered as one of the most resourceful areas of the country.
14. Vast sums of money were spent on the war by the state and non-state sectors. The crises have severely reduced the access to external resources and foreign capital inflows hindering efforts to reach the development targets.
15. During 1983-2009 periods every successive government's main concern was to achieve a victory against the civil war. Due to this development targets were not achieved as set.
POST WAR DEVELOPMENT TARGETS OF SRI LANKA
16. It says that without peace, there is no development and without development there is no peace. The security problem in the past has damaged Sri Lanka's image world wide. Since the country had succeeded in overcoming its security problem in year 2009, currently it is planning to attract a higher quantum of foreign investment which will lead to rapid economic development of the country.
17. After the tragic conflict, the Sri Lankan government saw an opportunity to transform a military victory into economic growth. Earlier the war and political unstability were the main barriers for new investments, but now both are resolved. With the end of the war, Sri Lanka has become an ideal location for investment as the cost of doing business has been reduced significantly.
18. One of the Government's development aims is to double per capita income from $2,000 to $4,000 within the next six years  . A substantial increase in the level of Foreign Direct Investment (FDI) that Sri Lanka attracts is a must for the country to meet this target. According to the country's state investment body the Board of Investment (BOI), Sri Lanka's target is to attract FDI in 2010 to a record of US$ 1 billion within the war-free environment of the country.  This target is mainly expected to be achieved through tourism and outsourcing sector projects. All Sri Lankan authorities including the BOI are focusing on establishing investor confidence and promotion, facilitation, and retention of foreign investments.
19. Earlier Sri Lanka has mainly targeted investments from India, China, and Malaysia. But now it focuses on Western nations too. Because of the war, the Western Nations were reluctant to invest in Sri Lanka in the past. In order to make those nations aware about Sri Lanka the BOI is attempting at having a lot of interactions with chamber of commerce in European countries and the USA. The comprehensive Foreign Direct Investment promotion in the West Coast of USA is one of such efforts taken by the BOI  . Several other missions conducted by the Government in all over the world during post war period have resulted in many investors to become interested in post-conflict Sri Lanka. Among them China and India plays a major role.
20. The re-integration of North and East to the rest of the country after the 30year war has created a huge potential in new investment opportunities, specially in the tourism and agricultural sectors. According to the BOI officials former war zone in the north and east of the island would provide special concessions, including a 15-20 year tax holiday for the interested investors.
IS SRI LANKA READY TO FACILITATE THE NEW INVESTMENTS?
21. Sri Lanka has numerous attractions for foreign investors. As in several of the Asian comparators, there is the potential to build on the country's rich natural resource base to develop higher-value-added agricultural and manufacturing products and tourism and related services.
22. The Government is implementing a very ambitious plan in developing infrastructure that will benefit the economic activities in the country. With that the infrastructure bottlenecks to invest will also being sorted out. The program, "Uthuru Wasanthaya" is one of the programs launched by the government in order to rebuild and develop Northern Province 
23. According to the available data there is a remarkable increase in number of tourist arrivals to the country after gaining the peaceful environment within the country. In the first half of this year, Sri Lanka's tourist arrival has increased by about 49 percent compared to the past year. Over 700,000 tourists expected in 2011  .In order to cater for this demanding sector the tourism industry is needed to be improved by identifying tourism sector as a key thrust area. For that the government has taken steps to promote and facilitate the foreign investments in the tourism sector specially in the north and east part of the country. Three year action plan from 2010 to 2012 for the development of the Eastern Provinceis one of the actions takenby the Sri Lanka Tourism Development Authority (SLTDA).
24. A vibrant investment promotion policy is essential for the country after the end of the war to attract much needed foreign direct investment.
25. The incentives provided by the BOI are sometimes criticized by various local and foreign institutes and Sri Lanka has been requested a several times in different occasion to revise the investment incentives. According to the IMF, the tax incentives signify a huge income loss to the government and the Sri Lankan economy. Hence, the government is planning to introduce several amendments to the current incentive package from the 2010 budget which will advantageous both the country and the investor  .
1. The study is based on time series data of Foreign Direct Investment (FDI) from 2005-2010.Further, data was collected on investment and No. of investment applications received by the BOI for a period of one year from either side of 2009 May and was used for the analysis.
2. Secondary data required for the project was collected from the Board of Investment of Sri Lanka, the country's state investment body. Senior officials who are dealing with FDI data and hold the responsibility for providing FDI data to the Central Bank were interviewed. Information was collected from Management Information System (MIS), Research Department and the Annual Reports of the BOI under the categories of yearly, monthly, country wise and sector wise basis. Trends in the FDI Inflow during the past years were gathered by referring Central Bank Annual Reports and from the articles published in news papers and internet.
3. The collected data was manipulated and arranged in a way that it is easy to use them to be analyzed to achieve the intended objective of the research. Microsoft Excel was used to prepare the tables and graphs through out the research since it is a user friendly analytical tool.
Annual FDI (2005-2010)
FDI (US$ Mn)
4. Accordingly, Table 1 above carries the annual FDI inflow to the country during the considered period of 2005-2010. The values are given in US$ Mn and the value recorded for year 2010 is only for the period of January - June 2010.
Amount of investment and the number of projects received
May 08 to Apr 09
May 09 to Apr 10
Source: BOI Investment Department
4. Table 2 above indicates the amount of investment and the number of projects Sri Lanka has received during a period of one year from either side of May 09' (i.e. before and after ending of the war in the country). For the purpose of analysis the data indicate only the number of projects and the investment value in Rs. Mn value. The data collection period ranges from May 2008 to April 2009 and from May 2009 to April 2010.
Country wise Investment
FDI (US$ Mn.)
Source: BOI, Statistical Unit/Research & PA Dept
5. Table 3 above summarizes the country wise investments recorded in each year from 2006-2010. Eleven countries which have contributed in higher percentages for the total FDI over the considered time period were taken for the analysis. The total value of FDI recorded in each year and the country wise contribution for that is represented in the table. All the values are given in US$ Mn. Values given for the year 2010 represent the period of January - June.
Cumulative increase in FDI from India to Sri Lanka (1993-2007) 
F:\PRATIBA\My Pictures\untitled.bmpSource: BOI
FDI - (2005-2010) -By Sector
FDI (US$ Mn.)
Food, Beverages & Tobacco
Textile, Wearing Apparel& leather
Wood and Wooden product
Paper, paper products & printing
Chemicals, petroleum, coal & Plastic
Electronics & Electricals
Non-metallic& mineral products
Fabricated Metal, machinery &
Other manufactured products
Horticulture & cultivation of fruits &
Housing, property development &
shopping & office complexes
Telephone & Telecommunication
Hotels & Restaurants
IT & BPO
Source: BOI Research Department
6. Table 4 illustrates the cumulative value of FDI recorded in the Manufacturing, Agriculture, Infrastructure and Services sectors in a detailed manner. The sector wise FDI contribution to the total annual FDI is given in the table. Further, the contribution of sub-sectors to the total figure also can be extracted clearly.
ANALYSIS OF GENERAL OBJECTIVE
1. The collected data was analyzed and manipulated accordingly toachieve the general objective of the research i.e. finding out whether the post war environment in Sri Lanka conducive to greater FDI.
2. The data on FDI inflows into Sri Lanka are given in Figure 1 during the period from 2005 to 2010. During the considered period, FDI have been rising steadily until 2008 and the value of FDI inflows recorded its highest level of US$ 888.935.After that it started showing a declining trend. It has come down to US$ 601.25 in 2009 and has further declined to US$ 208.056 during the period of Jan-Jun 2010.
3. A summary of investment values that Sri Lanka has received from May 2008 to April 2009 (Period with the war) and from May 2009 to April 2010 (Period after the war) is given in the Table 5.
Investment Before and after the war
Investment Rs (Mn)
(May 08 - Apr 09)
(May 09 - Apr 10)
4. The above data is represented using a column chart in Figure 2. From the first sight it is visible that the investment received after the war (as represented by red) is higher than the investment received during the period of war (as represented by blue).
5. It is evident from Figure 3 that there is a significant increase in the number of projects received by the BOI during the period of May 09' to Apr 10' (i.e. after end of war) compared to number of projects received during the period of May 08' to Apr 09' (i.e. period taken in to account with the war). Number of projects received during the war period was only 321 while it has increased to 469 after gaining the peace in May 09'. It is a 68.4% increase.
6. When consider the investment scenario in Sri Lanka, the major sources of FDI for past few years are Malaysia, UK, and India. From the Figure 4 it is evident that Malaysia is having the maximum share of FDI inflows to Sri Lankaforfour years running -2006/2007/2008/2009.This is primarily because of the massive investment by Dialog Telekom through Telekom Malaysia  .Malaysia is a developing country and for a developing country to be the largest investor in Sri Lanka for several years is a special incident.Similarities in cultures and close ethnic ties are some of other reasons for high Malaysian investments.
7. However, the trend has been changed in the year 2010 where basically the Indiahas become the major investor in Sri Lanka, as is evident from Table 6. Indo-Lanka Free Trade Agreement which was signed in1998has made it attractive for Indian investors to set up plants in Sri Lanka during past years. This agreement has huge potential for generating FDI focused on the Indian market. The principal sectors that have attracted Indian investment are steel, cement, rubber products, tourism, computer software, IT-training and other professional services. In the past years leading companies of Indian origin operating in Sri Lanka includeLanka IOC, John Keells Institute of Information technology, CEAT- Kelani Associated Holdings Ltd, Ceylon Ambuja Cement (Pvt) Ltd, Asian Paints Ltd and the Ceylon Glass Company Ltd, BharatiAirtel and Ultratech Cements.
Country wise Investment 2010
As a %
ANALYSIS OF SPECIFIC OBJECTIVES
8. In order to achieve the first specific objective of finding out which sectors have the growing interest among foreign investors with the return of peace following ten sectors as in Table 7 were compared over the period of 2008-2010. Figures clearly shows that the tourism sector has recorded an increasing trend by attracting 95 projects in 2010 compared to 28 recorded in 2008. Number of projects under power generation also shows an increasing trend, while housing and property development sector which was dominated earlier has showed a declining trend.
No. of projects
Computer software development
Cultivation of fruits and vegetables
Education and Training
Hotels, Restaurant Services and Enter. Centers
Housing and property development
Power generation plants
Production of food, meat, fish, dairy products
Source: BOI Investment Department *Jan-Oct
PRESENT POSITION OF THE BOI PROJECTS
9. According to the information gathered from the BOI, at present 1472 BOI projects are in commercial operation while 891 projects are under implementation. Most of the successful enterprises operating in the country are under the BOI status.
Chemical, petroleum, coal, rubber & plastic
Fabricated metal, machinery & transport equipment
Food beverage and tobacco
Non-metallic material products
Paper, paper products & printing
Services and Horticulture
Textile, Wearing Apparel & leather
Wood and Wooden product
Source: BOI Investment Department
STRATEGIES TO ATTRACT MORE FDI TO THE COUNTRY
10. According to the information gathered from the BOI officials, at present the BOI has suspended the acceptance of investment applications for new projects pending the 2011 Budget. It is said that the Government is going to introduce a new incentive package with a view to increasing FDI for large scale projects including industrial ventures in a way to utilize the newer opportunities arised with the return of peace and stability. Replacing/Restructuring of the BOI with a new investment promotion authority making it more pro-active and focused towards attracting FDI is said to be another change that the Government is going to implement after the up coming budget.
11. At present BOI continues to accept new applications for large scale (>US$10 Mn) investments giving priority to some identified sectors namely Tourism, agriculture, fisheries and dairy, education and training, IT and BPO, Infrastructure and port and Aviation related development. Earlier the threshold for investments was only US$ 250, 000.
12. Establishment of better coordination among the BOI and the other line agencies in order to reduce red tapes in facilitating the investors are another important strategy.
FUNCTIONS OF BOI AND EXPORT PROCESSING ZONES (EPZ) CONCEPT
13. The Board of Investment of Sri Lanka (BOI) is the Investment Promotion Agency of the Government of Sri Lanka. Its main objective is to attract Foreign Direct Investments. The BOI assists investors at all stages of the process, from the application stage to the commercial operation. BOI provide specific incentives to the eligible companies including tax holidays, preferential tax rates, exemption from custom duty and foreign exchange controls etc. if they fulfill the qualifying criteria set out by the BOI Law.
14. At present, the BOI manages 12 Export Processing Zones (EPZ) that are available to investors to set up enterprises located in Katunayake, Biyagama, Koggala, Malwatta, Mirigama, Mawathagama, Wathupitiwala, Polgahawela, Horana, Pallekele, Seethawaka and Miriggawila. EPZs are a key aspect of export orientated development strategywhere some normal trade barriers are eliminated and established with the aim of attracting new business and foreign investments.
Map of Export Processing Zones in Sri Lanka 
FINDINGS OF THE RESEARCH
15. According to the above analysis it is found that the peaceful environment emerged in Sri Lanka in May 2009 has increased the amount of FDI to the country and the number of projects received by the BOI which proves the research hypothesis of the post war environment is conducive to greater FDI in Sri Lanka.
16. Though the government has targeted to achieve FDI value of US$ 1 billion during 2010, up to now the amount achieved was only US$ 208.056 which predicts that the set target is difficult to be achieved within the rest period.
17. According to the analysis is has revealed that Sri Lanka is becoming an attractive destination for Indian FDI. India was one of the top investors for the past few years. Malaysia, UK and china also play an important role in Sri Lankan FDI.
18. The results of the analysis show that the tourism sector is growing rapidly followed by power generation and agriculture sectors.
In view of the above findings the following conclusions were arrived at;
1. The post war environment in Sri Lanka is conducive to greater FDI. But the global economic down turn and other emerging destinations for FDI in South Asian region are the main reasons for lags in FDI. Further, the bottlenecks and regulatory shortcomings have constrained many investments. This indicates that the war-free environment is not the only determining factor for FDI inflow.
2. The role of tourism in the national economy has always been important. Tourism sector which include hotels, restaurants and the recreational centers is the most attractive sector for FDI at present. Integration of North and East part to the rest of the country after the war, rapid infrastructure development carried out by the government in North and East part of the country and the targets set by the Sri Lanka Tourism Development Authority (SLTDA) to be achieved within next few years have positively affected for the boom in tourism sector.
3. Discussions for restructuring of the BOI, making it more pro-active investment promotion agency of the country, and making it the only contact point for investment and strengthening its functions to ensure speedy clearance of investment approvals is being carried out.
4. Substantial number of investment projects have been received by the BOI after gaining the peaceful environment within the country.
1. It is recommended to introduce reforms to the existing investment policy in order to create a conducive environment for foreign investments. The foreign investment policy should be reviewed on regular basis and necessary changes should be done. Regulatory and tax reforms and institutional reforms are important. Liberalizing the investment climate is essential in order to achieve the maximum advantage of peaceful environment.
2. It is recommended that action should be taken to fast tracking and realizing of investments coming to Sri Lanka. Facilitate the investment with after service care is important which include helping them to obtain necessary approvals, sort out operational problems etc. This will reduce no of projects which are under implementation period and closing don of projects.
3. It is recommended to improve the managerial and technical manpower, skilled labour within the country in order to strengthen the country as an attractive destination for foreign investments.
4. It is recommended to take every possible step to establish sustainable tourism development in Sri Lanka. The enormous tourism potential in East province of Sri Lanka should be utilized in a more efficient manner by attracting most suitable investments.
5. It is recommended to create strong investment relations with India since it is becoming one of the world's most dynamic economies and attractive markets.
6. Finally the BOI has to review its investment strategy to fit with the new priority sectors such as tourism, IT/BPO, agriculture, education, urban development etc. The organization and structure should facilitate the national economic development. One of the key element in reorganization is to pay attention on how to better coordinate with other state organizations such as Customs, Inland Revenue, Exchange control, Central Environment Authority (CEA) in facilitating the investment process. The existing red taps should be clearly identified which slow down the process.
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